Tesla’s Q3 Earnings Show Sequential Margin Improvement; Stock Slightly Undervalued

Tesla Stock at a Glance

• Current Morningstar Fair Value Estimate: $250
• Tesla Stock Star Rating: 3 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable

Tesla Earnings Update

After incorporating Tesla’s (TSLA) third-quarter earnings into our model, we maintain our $250 per share fair value estimate and narrow moat rating.

We saw few surprises in Tesla’s detailed results. The company reported record deliveries earlier in the month, and the vehicle volume growth was present in the company’s financial results as it generated record revenue. Despite the continued ramp up of the two new factories (one in Austin, Texas in the U.S. and one in Berlin, Germany), companywide operating margin improved sequentially versus the second quarter. This is in line with our view that the factories will become more profitable each quarter as production increases, eventually leading to margin expansion.

Despite the signs of improvement in line with our long-term outlook, shares were down 5% in after-hours trading. With our outlook intact, we view Tesla shares as slightly undervalued, with the stock trading a little more than 15% below our fair value estimate but in 3-star territory. As such, we recommend investors wait for a larger margin of safety before considering an entry point.

We think some of the after-hours selloff is due to revenue coming in slightly below consensus estimates. Given that the company already reported lower deliveries, we think consensus may have been expecting higher average price increases during the quarter. We calculate a 5% year-on-year price increase and we expect average selling prices to rise further in the coming quarters. Given that Tesla’s backlog was roughly 3-6 months of production, we think there will likely be a lag from when the company raises prices to when it shows up on the financials.

Our long-term outlook is intact. We expect Tesla will eventually grow vehicle deliveries to over 5 million vehicles by 2031. We forecast the company will be able to reduce unit production costs, while also growing ancillary services including autonomous driving software and insurance subscriptions, driving margin improvement.